Profitability and consistency analysis of Steel Sector in India

Authors:
1. Dr K.S. Vataliya ( M.Com, Ph.D) Principal M.J College of Commerce Bhavnagar university, Bhavnagar. 2. Rajesh A. Jadav (M.Com) Lecturer in BBA M.J. College of Commerce Bhavnagar university, Bhavnagar. Contact no: 8460385821 E-mail id : jadav2rajesh@gmail.com

Address of Institute : M. J. College of Commerce(B.B.A) Bhavnagar University Vidhyanagar, Bhavangar,Guajrat 364002

Abstract
In India, Steel sector is one the most promising & growing industry. But form the point of view of profitability & consistency these are the not as good as it is for overall industry & it differs form one company to other. Under the study we have taken the four major players working in the steel sector in India & taken the financial data of all the companies for three financial years. For the research purpose, there are various ratios which are calculated & further taken into consideration for the different tests. In the study secondary data are used which are collected from internet. Objective of study is to analyze the performance of each company by profitability & consistency under the study & give them various ranks according to their performance. Thus, it is useful for the measurement of overall performance of various companies under steel industry in India.

Key Words: Steel sector in India, Profitability & Consistency

Introduction The Indian iron and steel industry is nearly a century old, with Tata Iron & Steel Co (Tata Steel) as the first integrated steel plant to be set up in 1907. It was the first core sector to be completely freed from the licensing regime (in 1990-91) and the pricing and distribution controls. The steel industry is expanding worldwide. For a number of years it has been benefiting from the exceptionally buoyant Asian economies (mainly India and China). The economic modernization processes in these countries are driving the sharp rise in demand for steel. The New Industrial policy adopted by the Government of India has opened up the iron and steel sector for private investment by removing it from the list of industries reserved for public sector and exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are freely permitted up to certain limits under an automatic route. This, along with the other initiatives taken by the Government has given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/greenfield steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies. Soaring demand by sectors like infrastructure, real estate and automobiles, at home and abroad, has put India's steel industry on the world map. Dominating the Indian horizon is steel giant Tata Steel, whose takeover of the UK-Dutch steel company Corus is the country's biggest buyout. Meanwhile, the LN Mittal-owned Mittal Steel acquired French steel company Arcelor to create the world's number one steel company, Arcelor Mittal; and Korean steel giant POSCO is pumping money into mines and steel plants in Orissa to emerge as one of the biggest steel plants in the state.

India's steel production during 2010-11 was 75.463 MTPA in (upto December 2010). India has emerged as the fifth largest producer of steel in the world and is likely to become the second largest producer of crude steel by 2015-16. Considering a steel consumption of 300 kg per man per year to be a fair level of economic development, India will have to come up to somewhere around 300 million tonnes, if it is to fulfill its ambitions of being a developed country. That of course is a long journey from the present production level of around 50 million tonnes but one must consider its past before coming to a conclusion about its potential. India was producing only around a million tonnes of steel at the time of its independence in 1947. By 1991, when the economy was opened up steel production grew to around 14 million tonnes. Thereafter, it doubled in the next 10 years, and then it is doubling again, maybe over a slightly longer span. Steel Production in India is expected to reach 124 million tons by 2012 and 275 million tons by 2020 which could make it the second largest steel maker.
Total Finished Steel (alloy+non-alloy): Production for sale (million tonnes) Year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 Main Majors and Other Producers Producers 12.686 13.198 14.534 15.383 15.824 16.413 19.670 20.178 22.632 25.326 27.689 30.153 Grand % of share of Total Majors and Other Producers 32.356 33.376 37.166 40.709 43.513 46.566 60.8 60.5 60.9 62.2 63.6 64.8

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (Prov) Source : JPC

17.614 18.020 17.216 18.038 18.280

34.915 38.055 39.948 42.586 47.733

52.529 56.075 57.164 60.624 66.013

66.5 67.9 69.9 70.2 72.3

Objectives

To measure the performance of the companies according to their p r o f i t a b i l i t y. To measure the performance of the companies according to their consistency. To give rankings to the sample companies as per their overall performance.

Hypothesis and Research Methodology

Hypothesis 1: H0: There is no significant difference between gross profit margin ratio of companies. Ha: There is a significant difference between gross profit margin ratio of companies. Hypothesis 2: H0: There is no significant difference between net profit margin ratio of companies. Ha: There is a significant difference between net profit margin ratio of companies. Hypothesis 3: H0: There is no significant difference between operati ng expenses ratio of companies. Ha: There is a significant difference between operating ratio of companies.

Research Methodology
Type of research:
Type of research used here is an Analytical Research, the researcher have used the facts already available and have analyze them to make a critical evaluation of the material. Sample design: Sampling design: The sampling used here is convenient sampling. Sample size: In the study, data collected from four companies consisting three financial years. Variables of Study: Dependent variables: Profitability and Consistency. Independent variables: gross profit margin, net profit margin, operating expenses ratio. Method of data collection: The data used to calculate the ratios are derived from balance sheet and profit and loss account of sample companies from the internet.

Method of analysis of data: Here data is preliminarily analyzed using a test called one-way ANOVA. ANOVA means analysis of variance. On the basis of ANOVA performed on each of the ratios some points are allocated to companies and on the basis of that conclusion is derived.

Analysis and Interpretation

Gross Profit Margin :SAIL Tata Steel JSW Steel 12.88 34.20 14.11 2011 19.40 31.36 17.33 2010 17.48 33.69 14.51 2009 ANOVA test performed on the above data gives following result. Anova: Single Factor Bhushan Steel 25.23 22.12 17.22

SUMMARY
Groups SAIL Tata Steel JSW Steel Bhushan Steel Count 3 3 3 3 Sum 49.76 99.25 45.95 64.57 Average 16.58667 33.08333 15.31667 21.52333 Variance 11.22613 2.292433 3.080133 16.30703

ANOVA
Source of Variation Between Groups Within Groups Total Interpretation: SS 589.4508 65.81147 655.2622 df 3 8 11 MS 196.4836 8.226433 F 23.88442 P-value 0.00024 F crit 4.066181

The test gives F-ratio value which is greater than the critical value for given degree of freedom. So the difference between Gross Profit Margin of sample companies is not because of sampling error or any other reason. This difference can be considered as a significant difference. So we can rank the companies for its profitability and consistency. We can allocate points to it ranging from 4-1as per the performance indicated by Average and Variance, given in the Summery section. They are shown in the following table. SAIL Tata Steel JSW Steel Bhushan Steel Profitability 2 4 1 3 Consistency 2 4 3 1

Net Profit Margin :SAIL Tata Steel JSW Steel 11.03 23.16 8.64 2011 15.73 19.96 11.09 2010 13.40 21.09 3.23 2009 ANOVA test performed on the above data gives following result. Bhushan Steel 14.42 14.96 8.42

Anova: Single Factor SUMMARY Groups SAIL Tata Steel JSW Steel Bhushan Steel Count 3 3 3 3 Sum 40.16 64.21 22.96 37.8 Average 13.38667 21.40333 7.65333 12.6 Variance 5.522633 2.633633 16.17503 13.1772

ANOVA
Source of Variation Between Groups Within Groups Total Interpretation: SS 291.5907 75.017 366.6077 df 3 8 11 MS 97.1969 9.377125 F 10.36532 P-value 0.003945 F crit 4.066181

The test gives F-ratio value which is greater than the critical value for given degree of freedom. So the difference between Net Profit Margin of sample companies is not because of sampling error or any other reason. This difference can be considered as a significant difference. So we can rank the companies for its profitability and consistency. We can allocate points to it ranging from 4-1as per the performance indicated by Average and Variance, given in the Summery section. They are shown in the following table. SAIL Tata Steel JSW Steel Bhushan Steel Operating Expenses Ratio:SAIL Tata Steel JSW Steel 16.37 38.11 20.08 2011 22.69 35.70 23.52 2010 20.41 37.68 20.42 2009 ANOVA test performed on the above data gives following result. Anova: Single Factor SUMMARY Groups SAIL Tata Steel JSW Steel Bhushan Steel Count 3 3 3 3 Sum 59.47 111.49 64.02 77.01 Average 19.82333 37.16333 21.34 25.67 Variance 10.24373 1.652233 3.5932 13.3807 Bhushan Steel 29.24 25.84 21.93 Profitability 3 4 1 2 Consistency 3 4 1 2

ANOVA
Source of Variation Between Groups Within Groups Total Interpretation: SS df MS F P-value F crit

553.7872 57.73973

3 8

184.5957 7.217467

25.57625

0.000188

4.066181

611.5269

11

The test gives F-ratio value which is greater than the critical value for given degree of freedom. So the difference between Operating Expenses Ratio of sample companies is not because of sampling error or any other reason. This difference can be considered as a significant difference. So we can rank the companies for its profitability and consistency. We can allocate points to it ranging from 4-1as per the performance indicated by Average and Variance, given in the Summery section. They are shown in the following table. Profitability 1 4 2 3 Consistency 2 4 3 1

SAIL Tata Steel JSW Steel Bhushan Steel

Final Analysis
In detailed analysis of each ratio, we have seen interpretation of the test performed on the ratio values of different companies. On the basis of that we can conclude which ratios can help ranking the companies on the basis of their performance. The ratios which are considered for ranking are: 1) Gross profit margin 2) Net profit margin 3) Operating expenses ratio On the basis of overall performance on ratios which are considered for ranking the following result and interpretation can be seen. We can decide the profitability and consistency of the companies and rank them for that. Profitability: The following table shows points that the sample companies have got for their performance on each of the ratios. Tata JSW Bhushan Steel Steel Steel Gross Profit Margin 2 4 1 3 Net Profit Margin 3 4 1 2 Operating Expenses Ratio 1 4 2 3 The average of all values for each company shows the performance of the company f o r p r o f i t a b i l i t y. W e c a n c o m p a r e c o m p a n i e s o n t h e b a s i s o f t h e i r a v e r a g e v a l u e s . SAIL

SUMMARY Groups Count Sum Average Variance SAIL 3 6 2 1 Tata Steel 3 12 4 0 JSW Steel 3 4 1.33333 0.33333 Bhushan Steel 3 8 2.66667 0.33333 The higher the average value, the higher the profitability of that company. According to this we get following result for profitability. Company SAIL Tata Steel JSW Steel Bhushan Steel Rank 3 1 4 2

Consistency
The following table shows points that the sample companies have got for their performance on each of the ratios. Tata JSW Bhushan Steel Steel Steel Gross Profit Margin 2 4 3 1 Net Profit Margin 3 4 1 2 Operating Expenses Ratio 2 4 3 1 The average of all values for each company shows the performance of the company f o r c o n s i s t e n c y. W e c a n c o m p a r e c o m p a n i e s o n t h e b a s i s o f t h e i r a v e r a g e v a l u e s . SUMMARY Groups Count Sum Average Variance SAIL 3 7 2.33333 0.33333 Tata Steel 3 12 4 0 JSW Steel 3 7 2.33333 1.33333 Bhushan Steel 3 4 1.33333 0.33333 T h e h i g h e r t h e a v e r a g e v a l u e , t h e h i g h e r t h e c o n s i s t e n c y o f t h a t c o m p a n y. According to this we get following result for consistency. Company SAIL Tata Steel JSW Steel Bhushan Steel Rank 2 1 3 4 SAIL

L i mi t a t i o n s , Fi n d i n g s & Co n c l u s i o n

Limitations T h e s t u d y i n v o l v e s o n l y t h r e e ye a r s o f c o m p a r i s o n . S o i t c a n o n l y p r e d i c t t h e p r o f i t a b l e t r e n d f o r a c o u p l e o f ye a r , n o t m o r e t h a n t h a t . The value of ratios depends on the definition of ratio and ca n vary slightly according to its definition in case of different companies. T h e s t u d y i n v o l v e s o n l y m a j o r p l a ye r s o f s t e e l s e c t o r i n I n d i a , n o t a l l the companies.

Findings Average of Tech Tata Steel was the highest among all the companies showing the highest profitability which was followed by Bhushan Steel & SAIL, the lowest average Gross Profit w as of JSW Steel . Average Net Profit of Tata Steel was the highest i.e 2 3.16 which was the lowest in case of JSW Steel i.e Approximately 3.23%. Whereas SAIL showed the average Net Profit of around 11 to 16 %. The huge gap between average net profit & gross profit in case of Tata Steel can visible showing the big burden of operating expenses in the c o m p a n y. T h e l o w e s t o p e r a t i n g r a t i o i s i n S A I L s h o w i n g g o o d c o n t r o l of management over the cost. F r o m t h e a n a l ys i s a n d i t s i n t e r p r e t a t i o n w e c a n f i n d o u t w h i c h r a t i o s are more important and which are less important in this particular case. Gross Profit Margin, Net pr ofit margin and Operating expenses ratio are more useful in allocating points to the companies for their performance. Return on total assets, return on net assets, return on equity and Dividend pay-out ratio are less important in this case so we cant use them for allocating points to the companies as their performance is almost similar on these criteria. Conclusion T h e m a j o r p l a ye r s o f S t e e l s e c t o r s h o w s u p w a r d s t r e n d i n c a s e o f p r o f i t a b i l i t y. W e c a n s t u d y t h e p e r f o r m a n c e a n d r a n k t h e c o m p a n i e s for its profitability; Tata Steel secured the first rank & Bhushan Steel, SAIL, JSW Steel followed by rest of companies. We can study the performance and rank the companies for its p r o f i t a b i l i t y; T a t a S t e e l s e c u r e d t h e f i r s t r a n k & S A I L , J S W S t e e l , Bhushan Steel followed by rest of companies.

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